The big mistake in America's terrifying debt

The United States spent $572 billion in interest on federal debt over the last ten months. This news from the Congressional Budget Office is not particularly alarming because $572 billion is 2.6 percent of GDP, and U.S. interest payments have averaged about 2.6 percent of GDP throughout the 2000s. In the 1980s and 1990s, interest payments on the debt were higher, peaking over 5 percent. But then again they were a little lower in the most recent past (tipping below 2.4 percent in 2015 and 2.5 percent over 2020-2021).

Since President Biden took office in January 2021, consumer prices have risen by 17 percent. Existing federal debt held by the public (today totaling $24 billion) therefore declined in real value, by some $4 trillion. The larger interest payments are, in part, returning debt principal to bondholders who have seen the value of their principal erode.

But here’s where the issue should be engaged. Interest payments and GDP are economic flows. Both series represent all transactions over a given span of time. Debt however is an economic stock number, a total at a single point in time. The appropriate comparisons for any type of analysis are flows with flows and stocks with stocks, not flows with stocks or stocks with flows (such as debt to GDP). Interest payments are at historical norms against GDP. The national debt is however best measured against another stock, such as national wealth. Just as inflation has eroded the value of the U.S. national debt, so too has it eroded the value of national wealth. The numbers are terrifying but no more terrifying than they have been in the recent past. The financial developments concerning interest payments and the real value of the debt are normal and explicable.